Border to Coast: cost savings and alpha generation
The success of the UK local government pool, Border to Coast, is walking publicity for the benefits of scale. In the three years since its inception, the fund has proven itself on both sides of the ledger, delivering significant cost savings for its underlying partner funds and giving them access to investments they might not have dreamed of. as individual entities. Border to Coast passionate CIO Daniel Booth talks to Amanda White about the fund’s success and the next step in her quest for constant improvement.
In 2015, the UK government ordered the more than 90 local council pension funds to be organized into eight capital pools allowing for more efficient asset management.
Border to Coast is the largest of those with 11 underlying funds with Â£ 55bn in assets.
While asset allocation ultimately remains with local councils, the pools are implementing the investments and working closely with partners in what is a great change management agenda. Border to Coast is building a fund management organization and a big part of that has been working together and making sure that investment funds are built that partner funds will ultimately use.
âCost is a big factor, but we’re not aiming for low cost,â said Daniel Booth, CIO of Border to Coast, in an interview with Top1000funds.com. âWe aim to be a successful and efficient organization. “
Build the team
Border to Coast has grown rapidly over the past three years as it built an asset management business that is client-owned and focused.
The investment team has grown from 15 to 50 people, with a total of 100 within the organization. About two-thirds of the team were hired in the past 18 months, during the lockdown, and about a quarter of the employees had never been to the office until last month, when the office reopened.
âIt’s important for the culture that people are together, especially the younger ones,â Booth says. âIt takes a bit more logistics to work in this hybrid way, to make sure the right teams are there on the right days. People have been separated for so long, there is an excitement to be back. There was a bit of fear and hesitation at first, but people are social creatures and love to be together. “
From a personal perspective, Booth said that while working from home he missed the creative conversations and brainstorming with other people.
âBefore the lockdown, I thought that would have been the technical things we needed to do in person, but that’s the creative thing, and brainstorming is hard to do from a distance. “
Six teams report to Booth: the internal equities and bond teams, external equities and bonds, alternatives which include private equity, private credit and real estate, then the risk and research team.
Internal vs. external
The fund manages around Â£ 25bn of the pools, soon to reach Â£ 30bn, in active equities and fixed income, with an equal internal and external allocation.
âAs we’ve built the business, part of it has been about what we want to build internally,â says Booth.
For example, in emerging markets there is an internal fund, but for some countries, like China, the opportunity for high alpha meant that the fund was willing to pay for external management in order to gain value. .
In general, the fund expects more from its external managers. To justify the costs, an outperformance of 2% for external management is the benchmark against 1% of outperformance for internal management.
âWe expect more from external management. We look at the relative cost savings to manage internally, the likelihood of success, and the alpha potential among others. There are about 10 things on our checklist.
But it’s not always black and white. For example, the management of investment grade credit could have been easily managed internally, but the cost savings were minimal and the fund therefore decided to assign it to external managers.
Border to Coast manages around Â£ 6bn of alternatives with this expected fastest growing asset class. About 40 percent of this amount is in infrastructure and 30 percent in private credit and private equity.
âWe collect more money every year. As the underlying client funds diversify, there are more alternatives, âsays Booth.
At the moment the investments are mostly funds, but there is some co-investment and Booth is keen to develop it.
âWe’re generating some pretty significant savings by aggregating assets and getting discounts. The alternatives have a very expensive implementation cost, so we make sure to be as efficient as possible on funds and co-investment, which are usually free or half-cost. “
Internal and external management surpasses benchmarks, according to Booth.
âWe generate around Â£ 250million of alpha to liabilities each year through active management. Our partner funds are aligned with this, they want us to optimize performance subject to a reasonable cost base.
In addition to the alpha generated, the fund is targeting Â£ 250million in cost savings over 15 years.
Cost savings are evident in a variety of areas; cheaper mandates on liabilities; savings on active mandates due to scale; co-investment in alternatives; effectiveness of implementation; and internal management.
Internal management has already proven to have demonstrable cost savings for partner funds. When the pound-linked bond fund was launched, a partner fund transferred a Â£ 500million investment, saving Â£ 0.7million in costs. In addition, when two partner funds were transferred to the alpha global equity fund, it resulted in annual savings of Â£ 0.9million.
Booth says the benefits of a professional investment team also mean that the underlying funds can benefit from implementation efficiency by paying close attention to withholding tax treaties, tax optimization. and securities lending income as well as service provider fees.
In July last year, Border to Coast entered into its first crossing contract on behalf of two of the partner funds. As part of the strategic asset allocation changes, one fund was looking to invest in UK listed stocks and another was looking to buy back. Through the collaboration, transactions were handled at the same time and the cost of cash redemptions was reduced, saving Â£ 3.5million. Since then, five more crossing agreements have been concluded.
While the cost savings are real and plentiful, Booth says that a more compelling benefit of pooling for underlying fund partners is the investment opportunity that scale presents.
Border to Coast has so far produced 10 vehicles in both public and private markets.
âWe’re giving them access to opportunities they didn’t have before, including managers with limited capacity,â Booth said, noting Brazilian infrastructure and Chinese healthcare as examples of nuanced investments.
Additionally, large alternative companies want to build relationships with large funds as strategic partners and local councils, as individual funds would not have been able to do so.
“We can have access to oversubscribed funds where we have not been reduced to allocations, to venture capital funds, to access to transaction flows, to co-investments where our pipeline is very active, and we are in a good position to be fairly selective, âhe says. âAlso having a professionally managed team with external managers supporting us enables active management and that means risks are managed and we earn a premium. “
A centralized, professionally managed investment function means there is less reliance on a single person and instead there is a large team with established processes. It also means that the fund can be a collective voice for its partner funds for business engagement and a catalyst for change.
The fund just announced a net zero commitment for 2050 and is also working with industry initiatives like the one with Albourne to improve reporting on alternative assets.
The fund continues to develop new investment vehicles for its underlying partners. From an investment standpoint, Booth says early stage companies are interesting right now because they benefit from the environment. He also says emerging market asset valuations look attractive and currencies look cheap.
âThere are a lot of exciting opportunities out there, like infrastructure and healthcare. These are cool things that customers couldn’t do on their own.
There will be significant expansion in private markets. There is considerable interest in specific climate opportunities, from new technologies to operating assets.
Global and UK real estate are the focus for the next moment, with real estate pooling being a big business due to tax complexities and more.
New equity offerings will also be developed, including global equities with different weightings and factor work.
âEverything we do is fundamental and active. All the equity indices are very concentrated and we believe that in a period when active management is going to do very well, we are well positioned for this. “
There is also a plan to develop co-investment programs for alternatives which will require a lot of work.
âI am a strong believer in continuous improvement, whatever we do, we can do it better. We want to continually improve our offering, learn best practices and continue to evolve, âsays Booth.
From a process and management perspective, the fund builds the tangential parts of the organization such as the research team, risk management and the systems that allow more active positions within the internal team.
âWe want to be able to review positions and understand the risks. Risk management is about managing the probability distribution of your results. So while research allows us to take active positions, risk management helps manage distribution, âhe says.
âI am proud to build a fund manager during a change management project, during a crisis and to produce good performance. It is a tribute to the hard work of many people. “